Wall St. thought things would be bad when MBIA (MBI) reported earnings, but they were worse. The largest bond insurer posted a loss of $2.3 billion, or $18.61 a share, compared with profit of $181 million, or $1.32 a are in the same quarter the prior year. No wonder the company made its announcement at midnight.

MBIA it took a $3.4 billion charge after writing down the value of residential and commercial mortgages as well as complex financial instruments that it guarantees.

The numbers from the financial firm are certainly an indication that write-offs for mortgage-related securities at all large banks and investment houses could get worse, and it probably also makes a bail-out of MBIA and Ambac (ABK) harder. Any institution putting money into the firms will have to wonder if it is enough or whether further losses will make an initial bail-out inadequate.

The simple argument is that banks should put up the money to keep MBIA in business. If the insurer fails, that value of many of the muni bonds it insures will drop, leading to more write-offs at banks which hold these securities. The banks may not have the capital, but their arms will be twisted by regulators using their self-interest as an excuse.

If the bond insurers are the keystone keeping the financial system from crumbling, then the states and federal governments should find another way to back these pools of debt. It will save local and state treasuries billions of dollars and save tax-payers from having to make up the borrowing costs of municipalities.

No matter how much the government wants big banks to step up for MBIA, they don’t have the money.

Douglas A. McIntyre

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